Two weeks ago, I had the privilege of keynoting the second edition of EventHorizon (EH), the largest conference on blockchain in the energy space. The bar for this event was set impossibly high after the last edition paved the way for a year of extraordinary developments in the space. The EH team delivered an even more impressive production, turning an old Berlin power station into a futuristic spaceship, and spoiling us with shows of lights, violins and acrobatics – not your typical energy conference. While we did not expect any less from Ed, Stefanie and team, we were left speechless a few times.

The craze on stage was a good reflection of the defiant rise of blockchain this year: massive coin offering rounds from very young startups, dozens of ventures sprouting all around the world, increasing interest from corporates and a continuous stream of announcements and releases. Overall, the growth of this space is unprecedented in modern energy history.

But as one attendee put it, the laws of physics must prevail, and gravity is inevitably pulling the blockchain hype down to earth. Regulators are cracking down on ICOs, investors are pointing out weaknesses of business models, and startups are realizing that scaling up governance and technology will stretch out their initial road maps.

Our mission at Cleantech Group is to help change-makers within large organizations turn innovation into opportunity. As a result, we focus on how new value streams are being created and captured. In a space like blockchain, this means going beyond the headlines and trying to understand its potential impact on current and future business models, and how close we are to commercial deployments.

To do that, we went through a month-long exercise of rebuilding our blockchain dataset and talking with most of the key players in the ecosystem. Our goal was to figure out if all the financing activity is moving the needle on deployments and value creation.

The quick answer is: despite more than a billion dollar raised, the blockchain scale-up is not going much faster than other technologies in energy.

I will use this article to share our resulting slides and provide some commentary on our market analysis. We’ll start by unveiling our new blockchain dataset, before reviewing market feedback from key players in the ecosystem. A bit of a long read, but it should give you a good sense of how the blockchain in energy market is evolving.

Investment in the field has skyrocketed to $1 billion

Since we presented at the first EH last year in Vienna, the ecosystem has grown beyond what anyone could expect. From around 35 companies or consortia at the time, we now track more than 150 in our wider cleantech theme. They are concentrated on core energy use cases, logistics and supply chain, the blockchain x IoT intersection, mobility, agriculture, and a few other applications like recycling.

Here is a simplified view of some of the companies we track:

The number of companies and projects grew in conjunction with an increase in funding events, encouraging more and more entrepreneurs to join the fray. While 2016 was relatively calm on the funding front (at least for core energy use cases), the first half of 2017 showed some interesting venture rounds taking place. In the second half, a new funding mechanism (coin offerings) propagated to energy-related projects, leading to massive rounds from Power Ledger and Grid+. This trend continued in Q1 2018, with coin offerings reaching as high as $100 million for Envion.

In consolidated terms, this activity amounted to $739 million over 53 deals in 2017 (with most of it in the second half), and $359 million in the first quarter of 2018 over only 15 rounds (a record for average deal size). Note that we started to see a slow-down in the number of rounds from Q4 2017 to Q1 2018. This may be a result of current regulatory hurdles on ICOs.

Let’s unpack these consolidated numbers and try to understand where the money came from, and where it went to.

Where is the money coming from?

The first key finding is that more than 90% of money raised in 2017 and 2018 came from coin or token offerings. Considering how new coin offerings are, and how recently they have been used on the energy side, this is quite stunning.

Another surprising finding is that these large sums of coin offerings are hiding a vibrant activity of more traditional financing rounds. Indeed, while much smaller in amount, 2017 saw more equity rounds (from seed to growth equity) in the space than coin offerings.

These rounds were led by a mix of traditional energy corporates and investors like Braemar Energy Ventures, innogy and TEPCO, and a new crop of crypto-investors such as Blockchain Capital, Outlier Ventures and Fenbushi. Scytale, the $100M fund created by Marc Cachia and Ed Hesse of Grid Singularity, has already made a few investments, notably into Ocean and Verv.

Where is the money going?

At the same date last year, Europe was trailing behind North America in terms of funding rounds and number of companies in the space. This has changed radically. Europe now outperforms North America both in terms of number of companies and amounts raised. The latter is striking: EU companies have raised $723 million to date, compared to $140 million for North America. Asia Pacific, with less companies than North America, has also raised much more money.

Explaining this reversal is tricky, but a few theories come to mind:

In a world of ICOs, money has no borders and the region that wins the pot is the one that produces the most new projects. Europe is clearly ahead in that game.

US corporates are generally more skeptical on the potential impact of blockchain in energy and its maturity. Regulation hurdles are also higher there. As a result, North American companies are having a harder time finding corporate partners and backers.

Whatever the reason, it is clear that Europe is currently building a leading position in blockchain innovation. We will be closely following how this balance evolves.

Looking at use cases, we notice that the balance between IoT and energy has changed, too. Last year, the intersection of blockchain and IoT was showing signs of maturity and investment. In 2017 and early 2018, core energy projects raised more money than IoT ones.

Going down a level, if we unpack the two green bars in the graph above, we find that the use case that has received most funding within energy is peer-to-peer and retail electricity trading. This is not very surprising, given that it is the use case that has received the most press and attention (again, a key to raising money in an ICO-rich context). However, as we will discuss in the second part of this article, it remains a use case that investors and corporates deem quite early-stage, and unlikely to generate value in the short- to medium-term.

Conversely, use cases like wholesale trading, which are deemed more commercially mature, have only raised small sums to date.

Before diving into what key stakeholders in the space have to say about value creation and growth, let us take stock of these numbers. In a year, we have seen the emergence of a $1 billion sector, at least in terms of financing, and of the extraordinary rise of a European ecosystem. The question is: are these huge war chests moving the needle in terms of value creation and capture? Are we starting to see the results in terms of deployment and disruption? This is what ultimately matters.

Raising money is not a business model

To better understand the state of deployment and maturity of blockchain in energy, we got in touch with some of the top players in the ecosystem – be they startups or project developers, financial investors or strategic corporates. All of them have participated in blockchain deals, or seriously considered entering ones.

Our questions revolved around 3 key points:

What are the most mature projects in blockchain and energy today? What stage are they at? When will they reach commercial scale?

What are the most pressing challenges these projects are facing? (We asked them to score these challenges on a 1 to 5 scale, 1 being super easy, 5 being mission impossible.)

What can move the needle on solving these challenges, and how fast?

The results were expected in some ways, and very surprising in others.

On use cases, it remains clear that peer-to-peer is not considered as part of the most commercially advanced use cases. Leveraging IoT and streamlining wholesale trading were lower-hanging fruits for most of the players we talked to.

Market perspective changes a lot based on who you are talking to:

Financial investors remain the most bearish group. They are skeptical about the novelty of business models, assigning the highest difficulty score to scaling-up, and do not see any commercial-scale deployments before 18 months from now. They are expecting heavy regulatory and technical challenges ahead. However, a few of them judge that the space is getting close to venture maturity, and will strongly consider making investments in the next 12 months. This is a big change, and a positive one for the space.

Corporates were a more diverse bunch. While most question the ability for blockchain startups to focus on commercial success, a few have found use cases that could bring more immediate value, and were going full-speed on those. All highlighted that blockchain startups were not focusing enough on product/market fit, and instead were developing a technology with too little concern for actual market problems. However, corporates gave the most generous ratings, in effect saying that these challenges are easier to overcome than we might think.

Startups were more optimistic in terms of general challenge level and their assessment of current maturity, but very conscious of a few difficulties, notably of building energy use cases on truly decentralized infrastructure. They are also quite conscious of the regulatory hurdles ahead.

According to corporates and investors, the blockchain scale-up is not going any faster than with other technologies. A sign that building huge war chests does not necessarily accelerate growth and adoption.

To emphasize that point, financing was never mentioned as a key to further scale-up. It may be because there is an abundance of money, it may be because people are starting to realize that building huge war chests will not get them closer to market fit. According to all, more partnerships and time to iterate are what is needed to make progress in the field.

It is interesting to reflect on this overall disconnect between startups and corporates. In general terms, the former are pushing for technical feasibility, while corporates are asking them to focus on product-market fit and business models.

This disconnect is what fuels some of the skeptical comments from corporates below.

Listening more closely to what startups have to say, they acknowledge the product/market fit challenge, but are more focused on:

Scaling energy use cases on public blockchains

Convincing energy players and governments to let them play with energy data and transactions

Scale governance and privacy

At some point, these two visions of scale-up need to collide – this may happen more frequently once solutions are mature enough to get confronted with markets.

This collision can be painful, and the transition from hype to deployment means times ahead will be more challenging than in 2017. Some companies will not make it. In this context, we generally anticipate some level of cool-down in the hype and the coin offering levels. This is a good thing. It will put pressure on entrepreneurs to prove value creation, but could lead to an increase in VC involvement in the market and eventually more impact.

That is as long as companies are able to convince on the business front: can they effectively tackle real markets, with competition from incumbent solutions? This is what will fuel the scale-up race.

If the year ahead is as interesting and surprising as the year we just had, we are in for a ride. Buckle up, and see you next year!